Experts Differ on Convention Center Hotel Financing

By Bill Dries

Updated 2:43PM

At the end of the final hour-long panel discussion during the two-day Southern Lodging Summit Downtown, Chad Crandell, the managing director and CEO of CHM Warnick – one of the best-known hotel asset management firms and advisers to hotel owners – made his pitch.

In the audience, sitting at two tables in the Memphis Cook Convention Center were Memphis Mayor Jim Strickland, city chief operating officer Doug McGowen, city chief financial officer Brian Collins and special counsel to the mayor Alan Crone.

Crandell, whose firm’s clients have included cities that built and own convention center hotels, made the argument for that option, as opposed to local governments offering subsidies to private hotel developers and owners.

“By and large, that was a very good decision for the cities that we represent because the hotel, if it’s done right and sold right … all the stakeholders are working together … these hotels can make a lot of money,” Crandell told the crowd at the summit, an annual event hosted by Pinkowski & Co. and the Metropolitan Memphis Hotel and Lodging Association.

A panel of experts at the Southern Lodging Summit this week offered some differing views on how to finance a new convention center hotel but a lot of the same advice on how to make it successful. (Daily News File/Lance Murphey)

“I think you really have to look at if you put a significant subsidy in a hotel, the city’s responsible for it,” he added. “I think you have to say, ‘If we go all in, what’s the risk of going all in versus just a subsidy?’ A subsidy will get you the hotel. But you are not going to get the economic benefit of owning that hotel.”

The advice didn’t change Strickland’s basic premise for the city’s fielding of various offers in the last year for a new, second convention center hotel to go with the existing Sheraton Memphis Downtown.

“The city of Memphis is not in the hotel business. We are in the police business, the fire business, the paving business and the sewer business,” Strickland said. “And we’ve made that clear and we still have two or three groups who say, ‘We want to put our private money into it.’”

On the same panel, Strickland’s view was backed by Butch Spyridon, president and CEO of the Nashville Convention & Visitors Corp.

Nashville’s Omni Nashville convention center hotel, which opened in 2013 along with the city’s new convention center, is privately owned with city subsidies.

“We created seven different funding mechanisms,” Spyridon said of the approach to city subsidies that include multiple revenue streams in case one revenue stream doesn’t live up to projections.

But Crandell said private ownership can make it more difficult for city-run convention centers to have blocks of rooms at a set rate or within a guaranteed price range for conventions and meetings.

The room blocks are essential, he said.

So is the rate, said Bharat Patel, founder of Sun Development & Management Corp., which develops feeder hotels. He says price gouging can happen.

“That creates a problem for them to come back,” he said of conventions, meetings and events that get a block of rooms but at a high price. “Room blocks are OK. But at what price?”

Nashville has room blocks but doesn’t have rate controls.

“They can easily jack the rate up and the client will walk away,” Spyridon said. “We’re trying to school the city on that. … You might get rich quick but you’ll pay the piper one way or the other.”

Strickland said city incentives can come with strings attached to make that possible without the city being in the business of operating and owning the hotel. And he said the city expects to contribute some kind of incentives and possibly city-owned land.

“I think that gives us some leverage to make sure there is a block of rooms for use of the convention center,” he said. “All the things that they pointed out, we’re interested in.”

The point goes to the balance of running a successful hotel that meets the needs of the convention center but doesn’t depend exclusively on it.

Crandell likened the convention business for such a hotel to being “a hotel within a hotel.”

Peter J. Phillippi, managing director of Piper Jaffray & Co., the leading financier of convention center hotels across the country for the last two decades, said room blocks and attractive rates have to work in balance with other factors even outside a convention center and connecting hotels.

“Keep it uniquely Memphis in terms of the design and just everything about it,” he said. “Memphis has so much to offer. People want to come here.”

That includes brands with a unique feel instead of by-the-numbers hotels with no difference from one city to the next.

For a large convention center hotel, Crandell recommended a five-year plan to layer convention and meeting business into the hotel.

Spyridon said Nashville leaders were promoting the convention center to meeting and convention planners before the center was even approved by local government. And he attributed the ability to do that to a unified front from business interests in Nashville.

“It didn’t have the chance to get screwed up in the politicians’ hands,” he said.

Asked about the biggest misperceptions about convention center hotel projects, Phillippi said, “I think that a convention center hotel is a panacea for all of the things going wrong with a convention center or a downtown.”